Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation*

Abstract

The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium.

The recent financial crisis, start‐up financing and survival

“…It is noteworthy, however, that contrary to the situation in many other countries, Belgian banks were able to limit the impact of the market turmoil on their supply of credit to domestic firms in general , as growth barely turned negative. Still, there is evidence that Belgian banks relocated credit from high‐risk to low‐risk firms (e.g., De Jonghe et al., ) and that start‐ups in particular were seriously hit by the financial crisis. For example, the average amount of credit supplied to start‐ups plummeted in 2008 by 32%, relative to 2007 (National Bank of Belgium, ).…”

“…Belgium was rather unique in that the growth in credit supply during crisis years – while decreasing sharply – did not turn negative for firms in general . However, the average amount of credit supplied to start‐ups plummeted in 2008, relative to 2007 (National Bank of Belgium, ) and banks relocated credit from high‐risk to low‐risk firms (De Jonghe, Dewachter, Mulier, Ongena, & Schepens, ). Moreover, interestingly, the financial crisis was not caused by a weakening of business fundamentals in Belgium but by the subprime mortgage crisis that originated in the US.…”

“…Belgium was rather unique in that the growth in credit supply during crisis years -while decreasing sharply -did not turn negative for firms in general. However, the average amount of credit supplied to start-ups plummeted in 2008, relative to 2007(National Bank of Belgium, 2009 and banks relocated credit from high-risk to low-risk firms (De Jonghe, Dewachter, Mulier, Ongena, & Schepens, 2016).…”

De-leveraging or de-risking? How banks cope with loss

“…In applied work, researchers have examined how banks adjust their risk profile in response to shocks. For example De Jonghe, Dewachter, Mulier, Ongena, and Schepens (2016) show that Belgian banks reallocated credit to less risky firms during the financial crisis. Liberti and Sturgess (2018) and Ongena, Peydro, and van Horen (2013) also suggest some tendency for corporate loan substitution after a shock, towards borrowers that are less risky in some sense.…”

“…As such, for our corporate and mortgage loan analysis, we implement the fixed-effects identification approach taken by Khwaja and Mian (2008) (KM). Recent papers that use the KM technique include: Schnabl (2012), Chodorow-Reich (2014), Jimenez, Mian, Peydro, andSaurina Salas (2014), Iyer, Peydro, da Rocha-Lopes, andSchoar (2014), Acharya, Eisert, Eufinger, and Hirsch (2014), Cingano, Manaresi, and Sette (2016), Bottero, Lenzu, and Mezzanotti (2016), De Jonghe, Dewachter, Mulier, Ongena, and Schepens (2016) and Heider, Saidi, and Schepens (2017). 11…”